Naked trading, which is when investors trade directly on exchanges using just a brokerage firm’s computer identification code, has exploded.
Indeed it now accounts for 38 percent of U.S. stock trading volume, according to research firm Aite Group.
The problem is that the anonymity makes it difficult for exchanges to know who to contact in case there’s a problem with a trade, The Wall Street Journal reports.
Naked access represents one segment of sponsored access. That’s when brokers let trading firms buy and sell on exchanges using the brokers' market participant identification codes.
Sponsored access makes up 50 percent of stock trading volume, the Aite report says.
The regular way for a firm to trade on a stock exchange is to register as a broker with the Securities and Exchange Commission and then become a member of the exchange. But that process is costly.
So some firms just pay registered brokers to use their computer code, hence the term “sponsored access.”
There is worry that the speed of these trades could lead to a market crisis. The SEC will look at proposals to regulate sponsored access in January.
"Everyone agrees that some sort of regulatory restriction will happen," Sang Lee, the report’s author, told The Journal.
Amit Manwani of Nomura Holdings told Reuters that while problems with naked access aren’t likely, "just because your neighbor is not going to rob your house, you're not going to leave your door unlocked."
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